OMINOUS PORTENTSDoug NolanFriday headlines from Bloomberg: “Retail Sales Rise Most in a Year, Marking U.S. Consumer Comeback” and “Consumers Turn Out to Be U.S. Growth Lifeline After All.” Ironically, U.S. retail stocks (SPDR S&P Retail ETF) were slammed 4.3% this week, trading back to almost three-month lows. Poor earnings were the culprit. Macy’s sank 15% on Wednesday’s earnings disappointment. Kohl’s missed, along with Nordstrom and JC Penney.

It may be subtle, yet it’s turning pervasive. Support for the burst global Bubble thesis mounts by the week. With stated U.S. unemployment at 5.0% and consumer confidence at this point still in decent shape, spending has enjoyed somewhat of a tailwind. Yet the overall U.S. economy has begun to succumb to a general Credit slowdown. Despite the bounce in crude, the energy sector bust continues to gather momentum. The tech and biotech Bubbles have peaked. Cracks have quickly surfaced in fintech. There are as well indications that some overheated real estate markets across the country have cooled. Whether it is from China or Latin America or Europe, the rush of “hot money” into U.S. real estate and securities markets has slowed meaningfully.

The slowing of Credit and “hot money” flows help explain the weakness in both corporate profits and the overall stock market. And with stock prices down year-on-year, Household Net Worth has essentially stagnated. Keep in mind that Net Worth inflated from $56.5 TN at year-end 2008 to a record $86.8 TN to close 2015. Over the past six years, Net Worth increased an average $4.76 TN annually. Such extraordinary inflation in household perceived wealth supported spending – which bolstered profits and underpinned asset price inflation and more spending. Let’s return to the irony of positive retail sales data and negative earnings. It’s easy to forget that retail had been significantly overbuilt during the mortgage finance Bubble period. The worst of the shakeout was avoided as Household Net Worth inflated from 384% (2008) to a record 484% (2015) of GDP. And while inflating perceived wealth boosted spending, zero rates and manic financing markets ensured another period of booming retail investment (bricks and mortar and Internet). There has, as well, been extraordinary growth in various services, certainly including telecommunications.In contemporaneous analysis of the Great Depression, there was insightful debate questioning whether over-investment or mal-investment was primarily to blame. Well, there was ample blame to go around. And this gets back to the fundamental thesis: It was not insufficient “money” after the 1929 Crash that was the root cause of economic depression, but instead gross excess of “money,” Credit and speculation throughout the Roaring Twenties. A few weeks back I noted analysis that placed excess global energy sector investment at several Trillion. And this week from Bloomberg (Agnieszka De Sousa), “Glencore CEO Lists Mining's Mistakes After $1 Trillion Spree.” And how many Trillions of over/mal-investment were spent in recent years throughout “tech,” biotech, pharmaceuticals and retail? Tens of Trillions throughout China and Asia more generally? Downward price pressures globally on so many things should be no mystery. And by now it should be indisputable that so-called “deflationary pressures” are not the consequence of insufficient “money.”In the name of “shortfalls in aggregate demand,” central bankers have flooded the world with “money” and Credit. Predictably, this unprecedented global monetary inflation has wreaked havoc on financial market behavior and investment patterns, while spurring self-reinforcing asset inflation and Bubbles. And aggregate demand? It is not - will never be - sufficient. As we’ve witnessed, Credit Bubbles redistribute and destroy wealth. Bubbles distort investment and spending patterns, which in the end ensure too much of a lot of stuff that the general population either cannot afford or does not desire.Newfound retail industry worries are intriguing. Energy – and even tech and biotech – sector excess was somewhat conspicuous, but relatively narrow in focus. Retail mal-investment is much more systemic – it’s virtually everywhere. Zero rates, the yield chase and QE flooded all facets of the sector with cheap finance. “Money” flowed freely into retail-related real estate investment trusts (REITs). Retail property prices inflated as “cap rates” collapsed. The upshot was additional construction and more retail. Meanwhile, booming property values and easy finance ensured that a lot of retail that should have went bust didn’t. While on the subject of busts, Lending Club dropped 50% this week. Count me skeptical of the incredible virtues of “marketplace lending,” “peer to peer” and “fintech” more generally. How much valuable innovation is available after decades of radical experimentation – not to mention thousands of years of lending? Yet every boom cycle greets financial innovation with boundless enthusiasm.I do appreciate that few businesses enjoy the capacity to grow accounting profits as rapidly as lending to those with difficulty borrowing from traditional sources/channels. Lenders can charge high rates, ensuring a profits bonanza so long as rapid loan book growth is maintained. Minimal provisions for future loan losses can be justified, with the percentage of seasoned loans turning sour remaining small in comparison to (rapidly expanding) total loans. But ballooning growth in loan books requires that the lender retains ready access to funding markets. Telecom debt in the nineties and subprime in the 2000s come to mind. It’s amazing how long ridiculous lending crazes can endure – and it’s equally amazing how abruptly the “money” spigot can be shut off. After last week’s drubbing, global financial stocks saw little relief this week. U.S. bank stocks were down 1.6% Friday, more than erasing the modest gain from earlier in the week. Bank stocks are now down 9.7% year-to-date, with the broker/dealers losing 12.7%.Globally, Italian banks sank another 2.9% this week, increasing 2016 losses to 36.9%. European bank stocks were volatile but ended the week little changed (down 22.1% y-t-d). The Hang Seng Financials sank 2.5% this week, increasing 2016 losses to 17.8%. It’s worth noting that the Shanghai Composite dropped 3.0% this week, increasing its y-t-d decline to 20%. China’s ChiNext (“innovative and fast-growing enterprises”) Index was clobbered 4.9%. May 9 – Reuters (Samuel Shen, Pete Sweeney and Kevin Yao): “China may suffer from a financial crisis and economic recession if the government relies too much on debt-fueled stimulus, the official People's Daily quoted an ‘authoritative person’ on Monday as saying. The People's Daily, official paper of the ruling Communist party, in a question and answer interview quoted the person as saying excessive credit growth could heighten risks and trigger a financial crisis if not controlled properly. ‘Trees cannot grow to the sky. High leverage will inevitably bring about high risks, which could lead to a systemic financial crisis, negative economic growth and even wipe out ordinary people's savings,’ the person… said in response to a question on whether stimulus should be used in future economic policy. ‘We should completely abandon the illusion of reducing leverage by loosing monetary conditions to help accelerate economic growth.’”China’s “authoritative person” sounds like he really knows what he’s talking about. Chinese officials face a quite serious dilemma. They’ve inflated history’s greatest Bubble and they apparently have come to appreciate that the current policy course is unsustainable. Housing Bubble to stock market Bubble to commodities Bubble to runaway Credit Bubble. At this point, it seems completely reasonable to me that Chinese officials recognize that there really is no alternative than reining in destabilizing Credit excess. I doubt they appreciate the complexities, myriad challenges and extraordinary risks that await them.May 13 – Bloomberg: “China’s broadest measure of new credit rose less than expected last month, suggesting that the central bank is starting to temper a flood of borrowing amid warnings from officials about potential side effects of the debt binge. Aggregate financing was 751 billion yuan ($115bn) in April…, below all 26 analyst forecasts… New yuan loans were 555.6 billion yuan, compared with the median estimate for 800 billion yuan… ‘Policy makers have started to think again and are holding back after injecting too much liquidity in the first quarter,’ said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd… ‘I expected a switch in policy, but didn’t expect it to come so soon.’”After a spectacular – and historic - $1.0 TN of Q1 Credit growth - total “social financing” fell to $115 billion in April. Was this abrupt slow-down policy-induced? What can be expected from Credit growth going forward? These are incredibly important issues with global ramifications. Confusion abounds. Do policymakers have a cohesive plan – or are we witness to epic floundering? Is Beijing unified or is dissension building? The week saw more air released from China’s commodities Bubble.May 13 – Wall Street Journal (Biman Mukherji): “China’s steel and iron-ore futures prices tumbled again as renewed worries about excess supplies sent traders rushing for the exits. Iron ore ended Friday down 5.2% at 363 yuan ($55.68) a metric ton, steel rebar down 4.6% at 2,030 yuan a metric ton and hot-rolled coil down 4% at 2,195 yuan a metric ton. For the week, iron-ore futures and steel-rebar futures… both dropped 13% and hot-rolled coil fell 12%, bringing the losses since the April 21 peak to the neighborhood of 25%.”The week saw little respite for faltering EM. South Africa’s rand sank 3.5% this week to a six-week low. The Mexican peso dropped another 1.7%, the Chilean peso sank 3.9% and the Colombian peso declined 1.2%. Rising instability had the Turkish lira falling another 1.5%, with Turkey’s stocks down 0.7%, “longest rout since December…” With Brazilian President Dilma Rousseff suspended while awaiting impeachment proceedings, Brazil’s currency declined 0.9%. Returning to the U.S. and the burst Bubble thesis, it’s worth nothing that the Transports sank 3.0% this week to two-month lows, having now given back all 2016 gains. Copper prices dropped 3.5%, trading to two-month lows. Ten-year Treasury yields sank eight bps to 1.70%, the low yield since January’s market tumult period. The bond market is just not buying into Fed talk of multiple rate rises this year. Instead, bond yields lend strong support for the view of latent U.S. and global fragilities. For me, the backdrop is reminiscent of previous early-stage deflating Bubbles. A Friday Reuters article certainly brought back memories – Ominous Portents. May 13 – Reuters (Sharon Bernstein): “California Governor Jerry Brown… is expected to amend his proposed $170.7 billion spending plan for the next fiscal year in the wake of unexpectedly low tax revenues. In January, Brown proposed a new state budget that increased public spending on education, healthcare and infrastructure in an indication of the state's continued rebound from years of economic doldrums. But earlier this week, state officials said that tax revenues for the first four months of the year were $869 million below projections, due in large part to unexpectedly low income tax revenues in April, which were more than $1 billion below expectations.”Friday headlines from Bloomberg: “Retail Sales Rise Most in a Year, Marking U.S. Consumer Comeback” and “Consumers Turn Out to Be U.S. Growth Lifeline After All.” Ironically, U.S. retail stocks (SPDR S&P Retail ETF) were slammed 4.3% this week, trading back to almost three-month lows. Poor earnings were the culprit. Macy’s sank 15% on Wednesday’s earnings disappointment. Kohl’s missed, along with Nordstrom and JC Penney.

It may be subtle, yet it’s turning pervasive. Support for the burst global Bubble thesis mounts by the week. With stated U.S. unemployment at 5.0% and consumer confidence at this point still in decent shape, spending has enjoyed somewhat of a tailwind. Yet the overall U.S. economy has begun to succumb to a general Credit slowdown. Despite the bounce in crude, the energy sector bust continues to gather momentum. The tech and biotech Bubbles have peaked. Cracks have quickly surfaced in fintech. There are as well indications that some overheated real estate markets across the country have cooled. Whether it is from China or Latin America or Europe, the rush of “hot money” into U.S. real estate and securities markets has slowed meaningfully.

The slowing of Credit and “hot money” flows help explain the weakness in both corporate profits and the overall stock market. And with stock prices down year-on-year, Household Net Worth has essentially stagnated. Keep in mind that Net Worth inflated from $56.5 TN at year-end 2008 to a record $86.8 TN to close 2015. Over the past six years, Net Worth increased an average $4.76 TN annually. Such extraordinary inflation in household perceived wealth supported spending – which bolstered profits and underpinned asset price inflation and more spending.

Let’s return to the irony of positive retail sales data and negative earnings. It’s easy to forget that retail had been significantly overbuilt during the mortgage finance Bubble period. The worst of the shakeout was avoided as Household Net Worth inflated from 384% (2008) to a record 484% (2015) of GDP. And while inflating perceived wealth boosted spending, zero rates and manic financing markets ensured another period of booming retail investment (bricks and mortar and Internet). There has, as well, been extraordinary growth in various services, certainly including telecommunications.

In contemporaneous analysis of the Great Depression, there was insightful debate questioning whether over-investment or mal-investment was primarily to blame. Well, there was ample blame to go around. And this gets back to the fundamental thesis: It was not insufficient “money” after the 1929 Crash that was the root cause of economic depression, but instead gross excess of “money,” Credit and speculation throughout the Roaring Twenties.

A few weeks back I noted analysis that placed excess global energy sector investment at several Trillion. And this week from Bloomberg (Agnieszka De Sousa), “Glencore CEO Lists Mining's Mistakes After $1 Trillion Spree.” And how many Trillions of over/mal-investment were spent in recent years throughout “tech,” biotech, pharmaceuticals and retail? Tens of Trillions throughout China and Asia more generally? Downward price pressures globally on so many things should be no mystery. And by now it should be indisputable that so-called “deflationary pressures” are not the consequence of insufficient “money.”

In the name of “shortfalls in aggregate demand,” central bankers have flooded the world with “money” and Credit. Predictably, this unprecedented global monetary inflation has wreaked havoc on financial market behavior and investment patterns, while spurring self-reinforcing asset inflation and Bubbles. And aggregate demand? It is not - will never be - sufficient. As we’ve witnessed, Credit Bubbles redistribute and destroy wealth. Bubbles distort investment and spending patterns, which in the end ensure too much of a lot of stuff that the general population either cannot afford or does not desire.

Newfound retail industry worries are intriguing. Energy – and even tech and biotech – sector excess was somewhat conspicuous, but relatively narrow in focus. Retail mal-investment is much more systemic – it’s virtually everywhere. Zero rates, the yield chase and QE flooded all facets of the sector with cheap finance. “Money” flowed freely into retail-related real estate investment trusts (REITs). Retail property prices inflated as “cap rates” collapsed. The upshot was additional construction and more retail. Meanwhile, booming property values and easy finance ensured that a lot of retail that should have went bust didn’t.

While on the subject of busts, Lending Club dropped 50% this week. Count me skeptical of the incredible virtues of “marketplace lending,” “peer to peer” and “fintech” more generally. How much valuable innovation is available after decades of radical experimentation – not to mention thousands of years of lending? Yet every boom cycle greets financial innovation with boundless enthusiasm.

I do appreciate that few businesses enjoy the capacity to grow accounting profits as rapidly as lending to those with difficulty borrowing from traditional sources/channels. Lenders can charge high rates, ensuring a profits bonanza so long as rapid loan book growth is maintained. Minimal provisions for future loan losses can be justified, with the percentage of seasoned loans turning sour remaining small in comparison to (rapidly expanding) total loans. But ballooning growth in loan books requires that the lender retains ready access to funding markets. Telecom debt in the nineties and subprime in the 2000s come to mind. It’s amazing how long ridiculous lending crazes can endure – and it’s equally amazing how abruptly the “money” spigot can be shut off.

After last week’s drubbing, global financial stocks saw little relief this week. U.S. bank stocks were down 1.6% Friday, more than erasing the modest gain from earlier in the week. Bank stocks are now down 9.7% year-to-date, with the broker/dealers losing 12.7%.

May 9 – Reuters (Samuel Shen, Pete Sweeney and Kevin Yao): “China may suffer from a financial crisis and economic recession if the government relies too much on debt-fueled stimulus, the official People's Daily quoted an ‘authoritative person’ on Monday as saying. The People's Daily, official paper of the ruling Communist party, in a question and answer interview quoted the person as saying excessive credit growth could heighten risks and trigger a financial crisis if not controlled properly. ‘Trees cannot grow to the sky. High leverage will inevitably bring about high risks, which could lead to a systemic financial crisis, negative economic growth and even wipe out ordinary people's savings,’ the person… said in response to a question on whether stimulus should be used in future economic policy. ‘We should completely abandon the illusion of reducing leverage by loosing monetary conditions to help accelerate economic growth.’”

China’s “authoritative person” sounds like he really knows what he’s talking about. Chinese officials face a quite serious dilemma. They’ve inflated history’s greatest Bubble and they apparently have come to appreciate that the current policy course is unsustainable. Housing Bubble to stock market Bubble to commodities Bubble to runaway Credit Bubble. At this point, it seems completely reasonable to me that Chinese officials recognize that there really is no alternative than reining in destabilizing Credit excess. I doubt they appreciate the complexities, myriad challenges and extraordinary risks that await them.

May 13 – Bloomberg: “China’s broadest measure of new credit rose less than expected last month, suggesting that the central bank is starting to temper a flood of borrowing amid warnings from officials about potential side effects of the debt binge. Aggregate financing was 751 billion yuan ($115bn) in April…, below all 26 analyst forecasts… New yuan loans were 555.6 billion yuan, compared with the median estimate for 800 billion yuan… ‘Policy makers have started to think again and are holding back after injecting too much liquidity in the first quarter,’ said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd… ‘I expected a switch in policy, but didn’t expect it to come so soon.’”

After a spectacular – and historic - $1.0 TN of Q1 Credit growth - total “social financing” fell to $115 billion in April. Was this abrupt slow-down policy-induced? What can be expected from Credit growth going forward? These are incredibly important issues with global ramifications. Confusion abounds. Do policymakers have a cohesive plan – or are we witness to epic floundering? Is Beijing unified or is dissension building? The week saw more air released from China’s commodities Bubble.

May 13 – Wall Street Journal (Biman Mukherji): “China’s steel and iron-ore futures prices tumbled again as renewed worries about excess supplies sent traders rushing for the exits. Iron ore ended Friday down 5.2% at 363 yuan ($55.68) a metric ton, steel rebar down 4.6% at 2,030 yuan a metric ton and hot-rolled coil down 4% at 2,195 yuan a metric ton. For the week, iron-ore futures and steel-rebar futures… both dropped 13% and hot-rolled coil fell 12%, bringing the losses since the April 21 peak to the neighborhood of 25%.”

Returning to the U.S. and the burst Bubble thesis, it’s worth nothing that the Transports sank 3.0% this week to two-month lows, having now given back all 2016 gains. Copper prices dropped 3.5%, trading to two-month lows. Ten-year Treasury yields sank eight bps to 1.70%, the low yield since January’s market tumult period. The bond market is just not buying into Fed talk of multiple rate rises this year. Instead, bond yields lend strong support for the view of latent U.S. and global fragilities. For me, the backdrop is reminiscent of previous early-stage deflating Bubbles. A Friday Reuters article certainly brought back memories – Ominous Portents.

May 13 – Reuters (Sharon Bernstein): “California Governor Jerry Brown… is expected to amend his proposed $170.7 billion spending plan for the next fiscal year in the wake of unexpectedly low tax revenues. In January, Brown proposed a new state budget that increased public spending on education, healthcare and infrastructure in an indication of the state's continued rebound from years of economic doldrums. But earlier this week, state officials said that tax revenues for the first four months of the year were $869 million below projections, due in large part to unexpectedly low income tax revenues in April, which were more than $1 billion below expectations.”

The country has reverted to its old tricks by fueling growth with more credit. Debt is now growing at historic rates.

By Jonathan R. Laing

Beijing Road in Guangzhou, China Photo: Bloomberg News

By all accounts, the economic slowdown in China was the major cause of the nasty U.S. stock market corrections in both August of last year and during the first six weeks of this year. The fear, of course, was that trouble in the Middle Kingdom would drag down global growth and stunt the U.S.’s muddling recovery.

But seemingly overnight in February, investor psychosis over China evaporated, and the Standard & Poor’s 500 index came roaring back 13% before settling back some last week. Nonetheless the S&P 500 and the Dow Jones Industrial Average are still slightly up for the year on a total-return basis, after being given up as roadkill in February.

Traders were seemingly emboldened by some better first-quarter numbers out of China that indicated at least some stabilization in its economy. First-quarter industrial production perked up slightly. Beijing reported year-over-year growth in gross domestic product of 6.7%. In March, China’s foreign-currency reserves grew for the first time in months, as the yuan steadied in value and capital flight seemed to abate.

BUT U.S. INVESTORS SHOULDN’T put too much stock in the China turnaround story. The government is notorious for inflating its GDP and other growth numbers. It’s a nation that appears to be drowning in too much debt.

Perhaps of greatest moment, Beijing in the first quarter seemed to panic, shoving nearly $1 trillion in new credit into the Chinese economy. That’s an epic amount for any economy, especially in a nation with a GDP of $10 trillion. The liquidity boost is the largest quarterly credit surge on record.

So for all the talk of Beijing restructuring away from an industrial and into a consumer-based economy, China seems to be resorting to an old model of debt-fueled growth that has seen its debt-to-GDP ratio surge from around 150% to well over 300% since 2008. This calculation of the ratio—higher than some other estimates—was made by Victor Shih, an associate professor at the University of California, San Diego, and an expert on the Chinese financial system. This ratio exceeds by a wide margin the debt burden of most developing economies.

China is paying the price for the past six years of malinvestment that resulted in mountain ranges of empty apartment buildings, vanity infrastructure projects comprised of unused highways, bridges, and exposition centers, and redundant industrial capacity. These projects yielded temporary GDP boosts during construction, but then lapsed into the netherworld of nonperformance, unable to generate the cash flow necessary to service underlying debt.

As a result, bad credit abounds, largely hidden from sight by loans that are “evergreened” and capital infusions from government-related entities to hide defaults. Perhaps hedge fund legend George Soros posed the issue most baldly in a statement he made a few weeks ago at New York’s Asia Society. He raised the possibility of the Chinese economy enduring a hard landing in the near future. He said the debt problem in the Chinese economy “eerily resembles what happened during the financial crisis in the U.S. in 2007 and 2008, which was similarly fuelled by credit growth…Most of the money that banks are supplying is needed to keep bad debts and loss-making enterprises alive.”

Indeed, the first-quarter credit surge has led to false signals that the long collapse in commodity prices is over because of a revival in all-important Chinese industrial demand. Trading in iron-ore contracts on the Dalian Futures Market has soared more than 400% from a year ago, with daily volume topping Chinese annual imports during many trading sessions (see Asian Trader). Coking-coal futures trading has also gone into hyperdrive. Both steel ingredients soared in price by about 40% this year, until the exchanges intervened early last week to raise margin requirements.

Yet this activity doesn’t reflect any increase in demand in the real Chinese economy. In fact, JCapital, a research outfit that closely tracks the Chinese economy, contends its on-the-ground surveys show steel and copper demand is expected to decline by 4% to 6%.

The heavy trading is more than likely a reflection of speculative bubbles akin to the bubble in Chinese stocks that died over the past year. Chinese punters will play any market if liquidity is available.

Likewise, in the event of any devaluation of the yen, commodity players would see their futures contracts or physical holdings revalued upward.

Some U.S. investors insist that whatever happens in China will stay in China. The rest of the global economy has scant exposure to Chinese debt or equities. After all, Japan’s debt-fueled travails of the past 25 years had little effect on the rest of the world.

We feel this is a naive notion. Just ask Apple, which suffered its first quarterly revenue drop in 13 years in large part from a decline in Chinese sales.

Hundreds of thousands of Africans are preparing to test their luck on the voyage across the Mediterranean to Europe. As the weather begins improving, the number of arrivals will rise -- as will the number of deaths.

Abdul Kadir Mohamed Moalim has seen hell. Originally from Somalia, a country ravaged by civil war, he traveled via a refugee camp in Yemen and then to Libya. From there, he crossed the Mediterranean to Europe.On April 16, an overloaded wooden vessel capsized on the high seas and only a few people on board managed to survive. Moalim was one of them. Now, he is in Kalamata, the Greek city that rescuers brought him to. In an interview conducted there by the BBC, he was asked if he had a message for those still in Africa who are waiting for their opportunity to flee to Europe. His answer: "It's so dangerous," he said. "You have to believe in your country and ... stay where you are."Moalim bore witness to a tragedy in which up to 500 Somalis, Sudanese and Ethiopians drowned, according to the UN Refugee Agency (UNHCR). That would make it the worst such accident of the last 12 months. In April 2015, a fishing boat sank while on its way from Libya toward Italy and up to 800 men, women and children died. Then, too, most of the victims were from sub-Saharan Africa. Europe continues to focus primarily on the war refugees coming from Syria, Iraq and Afghanistan. But it is often forgotten that increasing numbers of people from countries south of the Sahara are trying to head north as well. In 2015 alone, according to the European Union border control agency Frontex, 108,000 Africans made their way illegally to Europe. That represents an increase of 42 percent over 2014 -- and experts believe the total is but a harbinger of what Europe may soon be facing.The UNHCR calculates that there are currently 60 million displaced people worldwide. More than half of the military conflicts contributing to that total are to be found on the African continent, in places like Libya, Somalia, Nigeria and Mali. In addition, a devastating drought is ravaging Ethiopia and Eritrea and a famine is on the horizon.In total, 1.3 million refugees applied for asylum in the EU last year. Prior to its closure in March, the main path to Europe was the Balkan Route, primarily used by Syrians, Iraqis, Afghans and Pakistanis. Now, however, the route across the Mediterranean is coming back into focus. In the summer months, the sea can be crossed with relative ease.

A Cheap Ticket to Europe

Migrant smugglers are quick to change routes in response to political policy shifts. Should the traffic get backed up in one area, as in Greece at the moment, other routes are promoted over social media channels. Recently, that has included the Mediterranean crossing from Libya or Egypt to the Italian island of Lampedusa.Intelligence agencies are warning that hundreds of thousands of people are now waiting in North Africa for their chance to flee across the sea. Particularly from Libya, the dream of Europe looks closer than ever before: The often inadequately equipped boats put to sea by the migrant smugglers must only leave Libyan territorial waters 12 nautical miles from shore before sending out a distress call. Ships patrolling the waters of the southern Mediterranean as part of the EU operation Sophia must then collect them in accordance with international maritime law. Since September, some 13,000 migrants have been brought to EU territory as a result of this tactic.Recently, Austrian Foreign Minister Sebastian Kurz warned of the procedure, calling it a cheap "ticket to Europe." At a meeting in Luxembourg a week ago Monday, he and his EU counterparts offered assistance to the largely powerless Libyan prime minister to build up a coast guard. The reality, though, is that as long as the Libyan authorities refuse to grant EU ships permission to patrol Libyan territorial waters in their efforts to combat smugglers, the surge of migrants heading for Europe will not abate.In March alone, Italy registered 9,676 refugee arrivals -- four times more than in March 2015. Even more alarming, refugees from Syria and Afghanistan -- groups that have been most affected by the closure of the Balkan Route -- haven't yet returned to the path across the central Mediterranean. Currently, the migrants arriving in Italy mostly come from Nigeria, Gambia, Senegal and Guinea, despite the fact that their asylum applications are likely to be rejected, as is the case for most of those coming from Africa. Less than 30 percent of asylum applicants from Nigeria or Mali, for example, can expect to have their asylum applications approved in the EU.In its report "Risk Analysis 2016," published earlier this month, Frontex wrote: "The challenge here is to increase the ratio between return decisions and effective returns in line with the EU return policy." In other words, migrants whose asylum applications are rejected must be quickly deported. The report notes that prospective migrants are aware of the low probability of being sent back home and know about how easy it is to travel within Europe's border-free Schengen area. It is well known in Africa that those who manage to make it to Europe can usually stay.

Demands for Migrant Bonds

A position paper the Italian government submitted to the European Commission in mid-April likewise makes that case that the migrant debate has focused too much on war refugees. "Flows through the Central/Western Mediterranean route are composed mainly by economic migrants," the paper notes, adding that the challenge is expected to last for decades.Around 1.2 billion people currently live on the African continent, a number that will likely more than double by 2050, according to UN projections. That is one reason why Italian Prime Minister Matteo Renzi's government in Rome is demanding that the EU offer African countries both funding and cooperation on security issues. In a letter to the EU, Renzi also made clear what he expects in return: Financial aid, he wrote, should only be provided to those African countries that are prepared to reaccept asylum-seekers whose applications are rejected by European countries.Thus far, the European Commission has earmarked 9.2 billion to address the refugee crisis for the years 2015 and 2016. At the EU summit on June 28, European leaders plan to consider whether more money is needed. To the annoyance of the German government, Rome has proposed the issuing of "migrant bonds," which would allow Italy and Greece to raise additional funds. The bonds would be backed in part by Germany.Italy is feeling the pressure. With its 7,600 kilometers (4,720 miles) of coastline and islands off the coast of North Africa, it is virtually impossible for the country to seal itself off. Furthermore, it will soon become more difficult for migrants landing in Italy to travel onwards toward northern Europe: Austria has begunbuilding a border fence on its Alpine border with Austria at the Brenner Pass. Increased identification checks are to be introduced starting on June 1.The Swiss and the French have likewise increased vigilance on their borders with Italy on the lookout for unregistered migrants. The fact that many migrants travel through Libya, where Islamic State controls hundreds of kilometers of coastline, has made many nervous, particularly since the terror attacks in Paris in November 2015. There is concern that terrorists could enter Europe disguised as refugees. Frontex has warned that falsified Syrian passports present a significant problem. In particular, Frontex noted in its 2016 risk report, "False declarations of nationality are rife among nationals who are unlikely to obtain asylum in the EU."

Closure

Italy's reception facilities, currently holding 110,000 migrants, are already filled to overflowing. Only very few rejected applicants are actually deported, with many of them simply going underground. And with every day that the weather improves and the sea becomes calmer, the number of new arrivals increases. Italy may in fact be in the process of taking on the role that had recently been reserved for Greece: that of bearing the primary refugee burden for Europe.If Austria now seeks to reintroduce border controls on the Brenner Pass, then "we are faced with the threat that Europe will die here. The Brenner is the symbol of European unity," warns Arno Kompatscher, governor of the Italian autonomous province of South Tyrol, in which the south side of the pass is located. Prime Minister Renzi is also concerned about conditions on Italy's northern border. But Renzi, who has made three state visits to African countries since ascending to the premiership in February 2014, is also casting his gaze toward where the possible roots of the next refugee crisis are to be found. "If we want to fight poverty (and) uproot terrorism," says Renzi, "Africa is our priority today."Recently, the Italian prime minister sent a message that he takes his own rhetoric seriously. At almost exactly the same time as news of the most recent Mediterranean disaster hit the headlines, Renzi sent three Italian naval ships to a site 130 nautical miles south of Lampedusa. Their mission is to recover the fishing boat that sank there one year ago, together with the up to 600 dead Africans on board.Autopsies are then to be performed at the NATO base in Melilli -- in the hopes of identifying the dead and providing their families with closure.

Weekend Edition: What You Don't Know About Gold – The Biggest Myths on the Gold Market

Editor's Note: Gold isn’t an investment. Gold is money.

In today’s Weekend Edition, we're sharing an interview with Casey Research Director Brian Hunt. In it, Brian reveals some of the biggest misconceptions about gold… and why you should own it.
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Casey Research: Brian, as you recall, we probably get more questions and reader feedback on gold than on any other subject here at Casey Research… And we've noticed there are quite a few myths and misconceptions about gold out there. Can you go over some of the big ones for us?Brian Hunt: Sure. Probably the biggest misconception investors have about gold is that it's an investment.They'll listen to people on CNBC pick apart and analyze every $30 move in the metal, just as they would talk about a move in crude oil or stocks or bonds. They'll check the price quote every day… to see how their "investment" in gold is performing.That just isn't a useful way to view gold.Gold isn't an investment. A thousand shares of Coca-Cola is an investment. An income-producing rental property is an investment.Coke is a business that stands a good chance of growing its cash flows… which will allow it to pay increasing dividends to its shareholders. Bought at the right price, a rental property will return all of your original capital in the form of rent checks… and the rest is gravy.Gold isn't like those two examples at all. Gold is money.Gold has been used for money for thousands of years because it's easily di-visible, it's easily transportable, it has intrinsic value, it's durable, and its form is consistent around the world. And, as Doug Casey reminds us, it's a good form of money because governments can't print it up on a whim. It’s the only form of money that is not someone else’s liability.Gold doesn't pay interest or a dividend. It doesn't have profit margins. Your gold holdings amount to lumps of metal held in storage.The sooner investors realize that gold is money… and not a con¬ventional investment, the better off they'll be. It's just a timeless form of money. That's it.Casey Research: People can also view it as insurance, right?Hunt: Right. Since gold is real wealth you can hold in your hand, it's also "crisis insurance"… or "wealth insurance."Like regular insurance, you buy gold and hope you don't have to use it.Gold is insurance against governments doing foolish things with their finances. It holds its value, while paper money does not. The value of every paper currency plummets over time. Gold doesn’t.A currency is sort of like the share price of a country. Over time, if a country produces more than it consumes, saves money, and maintains a modest amount of debt, its cur-rency will rise.If a country consumes more than it produces… if it spends lots of money and borrows a lot in order to do all of that spending, its currency will fall in value. While currencies fluctuate for all sorts of reasons in the short term, over the long term, countries that manage their checkbooks will enjoy strong currencies. Countries that mismanage their checkbooks see their currencies plummet.I wish I lived in a country that produces more than it consumes… that values personal responsibility and saving money. I wish our government valued fiscal responsibility. But it doesn’t.About half the U.S. is on the government dole in some form or an-other. More than 45 million people are on food stamps. People are being paid by the government not to work. The people employed by the govern-ment enjoy huge, outsized salaries for what they do. There are more tax recipients now than tax payers. There is no political will to rein in spending and borrowing.This situation could easily result in a crisis. That's why I own gold… and recommend people keep at least 5% or 10% of their wealth in gold.But here's where I differ from the average gold owner: I'd love to see gold fall down to $300 or $400 per ounce. I'd love to see the value of my crisis insurance fall, rather than skyrocket… just like I don't want my family's house to burn down… or like I don't want someone to T-bone my car in an intersection.But when I look at the gang of clueless college professors and career politicians that occupy the White House and Congress, I’m not very optimistic.Casey Research: We all need insurance from those people. Do you think at least large institutional investors, like mutual-fund companies, understand gold?Hunt: Absolutely not. They are just as ignorant about gold as the average Joe on the street. They might even be worse.From the early 1980s to 2000, nobody worried about insurance. Stocks and the economy boomed for nearly 20 years. Gold languished for a long time.Its importance as real money – as a crisis hedge – was forgotten by most people… even by the supposedly smart folks who run big investment funds.They learned their trade during a period of rising stock prices and falling gold prices, so they think gold is something right-wing nuts stockpile alongside canned food in a bomb shelter. It's amazing how a few decades of smooth sailing will make folks forget gold's importance as insurance against disasters.I've heard lots of supposedly smart institutional investors pooh-pooh gold because it didn't perform well during the 1980s and 1990s. They'll post charts showing how it lagged behind stocks and real estate.It's a silly comparison, because gold isn't an investment like stocks and real estate can be. Gold is just gold. Like I said, you own it and hope to never have to use it. You don't get it confused with a stock like Johnson & Johnson.Casey Research: We think you've made your point. Any parting shots?Hunt: It's tempting to make comparisons to other wild periods like the 1970s or the 1930s. But those historical comparisons aren't worth anything. And I'm going to catch hell for saying this, but they aren't worth anything because this time is different.I know "this time is different" is a dirty phrase in the investment business – but given the global debt situation, our runaway entitlement spending, and the emergence of Asia as a large gold accumulator – this is a different gold market than any market we've ever seen.For those reasons, I don't place any value on forecasts based on gold’s past price action. I don’t place any value on attempts to value gold.I just own a lot of it. I hope I never have to use it. For me, it’s that simple.Casey Research: Thanks for your time.Hunt: My pleasure.

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